Certain bonds sold in the retail market (i.e. to individuals rather than to institutions) carry a provision whereby, in the event of a holder's demise, the holder's estate has the right, but not the obligation, to put back the bonds to the issuer at par. This provision is also found in certificates of deposit. It is variously referred to as an estate put, a survivor option, and less delicately, a death put.
A conventional call option embedded in a bond gives to the issuer of the bond the right, but not the obligation, to redeem it prior to its maturity at a preset price. A conventional put option, on the other hand, gives the holder the right, but not the obligation, to “put back” the bond at a preset price on a preset date. Typically, the option is put back at par. The value of these conventional bond options depends on the level and volatility of interest rates.
While the theory and practice for valuing and analyzing bonds containing conventional options such as calls and puts has matured over the last couple of decades, there has hitherto been no rigorous method applied to estate puts.
Accordingly, there is a need for an accurate method and system for analyzing and valuing bonds with estate puts.